Reducing import duties: How to determine value of goods

For­eign sup­pli­ers look­ing to import goods into the Euro­pean Union (EU) are sub­ject to import duty based on a num­ber of fac­tors. One of the fac­tors that affects the duty to be paid is the val­ue of the goods to be import­ed. This arti­cle explains how to deter­mine val­ue of the goods declared and how cus­tomers use CAPLIN­Q’s fis­cal rep­re­sen­ta­tion ser­vice to reduce their import duties by reduc­ing the val­ue of goods being import­ed into the EU.

How do EU customs determine the value of goods?

There are two ways that the EU cus­toms office deter­mine the val­ue of goods at the time of import into the EU

• The Cus­toms Tar­iff Num­ber used at the time of import
• The val­ue of the goods declared by the importer at time of entry

What is the Customs Tariff Number

The Cus­toms Tar­iff Num­ber, also called the Tar­iff Code, Har­mo­niza­tion Code or HS Code is a Euro­pean stan­dard­ized 10-dig­it code used to clas­si­fy trad­ed prod­ucts. Each and every trad­ed prod­uct imag­in­able can be clas­si­fied by a tar­iff num­ber. These tar­iff num­bers are sep­a­rat­ed into 21 sec­tions (at this writ­ing) that iden­ti­fy the broad cat­e­go­ry of the prod­uct. Each sec­tion then splits fur­ther into chap­ters which then nar­rows down right to the exact prod­uct being imported.

For exam­ple, the Tar­iff Num­ber 3907.30.00.90 refers to Epox­ide resins; in pri­ma­ry forms. This is the tar­iff num­ber used by the Epoxy Mold­ing Com­pounds that CAPLINQ man­u­fac­tures and sells.

Every Euro­pean cus­toms office refers to a mul­ti­lin­gual data­base called TARIC (TARif Inté­gré de la Com­mu­nauté) (French: Inte­grat­ed Tar­iff of the Euro­pean Com­mu­ni­ty) that con­tains all of these tar­iff num­bers, and along with them, there is a record­ed his­to­ry of all the importers that have ever import­ed prod­ucts into the Euro­pean Union using this tar­iff num­ber. Nat­u­ral­ly, with all this his­to­ry is also the val­ue of the goods that was declared at the time of import. These two ele­ments — Cus­toms Tar­iff Num­ber and “Val­ue of Goods declared” — pro­vide a very good indi­ca­tion of what the val­ue of the goods are when they arrive at cus­toms. The list of tar­iff num­bers is open to the pub­lic, but it is like­ly no coin­ci­dence that the val­ue of the goods record­ed at the time of entry is not pub­licly available.

What are the “Value of the Goods Declared?”

The sec­ond way the EU uses to deter­mine the val­ue of the goods is the “Val­ue of the Goods Declared” by the importer at the time of entry. This sec­ond method is beau­ti­ful in its sim­plic­i­ty, but this is where many importers end up “over report­ing” and end up pay­ing more than they need to in import duties. It is always request­ed to sup­ply a com­mer­cial invoice at the time of import. In the absence of any oth­er infor­ma­tion, importers often report the “Cus­tomers Sales Price” to customs.

Regard­less of the “Val­ue of the Goods Declared” pro­vid­ed, the cus­toms offi­cers will check this declared val­ue against the his­to­ry of prices report­ed for this tar­iff num­ber. If the val­ue is high­er than the record­ed his­to­ry, the cus­toms offi­cer will accept your declared val­ue and impose duty based on this val­ue. If it is much low­er, the importer will get a notice to please recheck the val­ue of the goods declared. Notice that they nev­er come back to you to inform you that the val­ue of the goods is high­er than oth­er importers!

Whether the goods are worth $1 or $1 mil­lion, the cus­toms offi­cer demands that the val­ue of the goods be declared and impos­es a duty rate. It is in the best inter­est of the importer (and their cus­tomers) to have this val­ue be as low as pos­si­ble to min­i­mum the duty paid.

CAPLINQ’s Fiscal Representation Service saves money by selecting the best Tariff Number

In anoth­er arti­cle, we explain how the import duty due is cal­cu­lat­ed. One of the ele­ments is the choice of Tar­iff Num­ber. Each Tar­iff Num­ber may have dif­fer­ent import duty rates that are imposed on it. The import duty rates can range from 0% up to some very high per­cent­age depend­ing on many fac­tors con­cern­ing that par­tic­u­lar trad­ed good. For exam­ple, if the prod­uct is bad­ly need­ed, or the tech­nol­o­gy can­not be obtained with­in the EU, the duties are low or 0%. On the oth­er hand, if the that par­tic­u­lar trad­ed prod­uct is pro­tect­ed with­in the EU such as sug­ar or dairy prod­ucts, then the tar­iff rates can be very high. These rules can change often, so it’s impor­tant to check the lat­est reg­u­la­tions con­cern­ing that par­tic­u­lar trad­ed good.

The spe­cif­ic tar­iff code can be select­ed dif­fer­ent­ly, if we can con­vinc­ing­ly argue that the trad­ed good in ques­tion belongs in a more favor­able tar­iff num­ber. For exam­ple, using our exam­ple above of Epoxy Mold­ing Com­pounds, a halo­gen-free epox­ide can have a more favor­able tar­iff num­ber than a halo­gen-con­tain­ing epox­ide. Dur­ing our fis­cal rep­re­sen­ta­tive set­up phase, we look into what the most favor­able tar­iff num­ber is for the trad­ed prod­uct and rec­om­mend it for use.

CAPLINQ’s Fiscal Representation Service saves money by reducing the value of goods declared

Most for­eign sup­pli­ers with EU cus­tomers don’t real­ize that import and sales of trad­ed goods are actu­al­ly two sep­a­rate trans­ac­tions. Yes, the goods must be import­ed into the EU before they can be sold, but the first trans­ac­tion is record­ed as an import trans­ac­tion and the sec­ond as a sales transaction. 

This is impor­tant to note because importers are often wor­ried if that if they use a low­er val­ue for the import val­ue than they do for the sales trans­ac­tion then they might get into trou­ble with their cus­tomers. For exam­ple, if cus­tomers were to learn that the sales val­ue is 3–8 times the import val­ue (which is often the case), then they might get offend­ed and demand a price decrease. As your fis­cal rep­re­sen­ta­tive, CAPLINQ signs a Non-Dis­clo­sure Agree­ment (NDA) that ensures that cus­tomers nev­er see the import value.

As your fis­cal rep­re­sen­ta­tive, CAPLINQ signs a Non-Dis­clo­sure Agree­ment (NDA) that ensures that cus­tomers nev­er see the import value.

Once for­eign sup­pli­ers rec­og­nize this, they often ask “how low can we (legal­ly) go to reduce import duties”? CAPLIN­Q’s rec­om­men­da­tion is the Cost of Goods Sold (COGS) price.

The COGS price, also referred to as the pro­duc­tion val­ue or the car­ry­ing val­ue is the cost of prod­ucts man­u­fac­tured by the importer. This def­i­n­i­tion is some­times sub­jec­tive for com­pa­nies look­ing to reduce their tax bur­den, but for our pur­pos­es, it is very spe­cif­ic — name­ly all the costs relat­ed to the pro­duc­tion of the good including:

• The parts, raw mate­ri­als and sup­plies used (often called the Bill of Mate­ri­als or BOM Costs)
• All labor costs to pro­duce the mate­r­i­al or parts, includ­ing pay­roll tax­es and benefits
• Busi­ness over­head allo­cat­ed to production

*Note this does not include any sales, mar­ket­ing or man­ag­er admin­is­tra­tion charges

Is declaring the COGS price as the Value of the Goods Declared” legal?

This ques­tion comes up often as com­pa­nies want to save mon­ey, but of course want do not want to do any­thing ille­gal. Let’s start by under­stand­ing that you, as the importer, know more about your own prod­uct and its pro­duc­tion process than any cus­toms offi­cer. At the same time, the cus­tom offi­cer (through forms and doc­u­ments) is only ever ask­ing you a sim­ple ques­tion, “Can you please tell me the val­ue of your product?”

In this sim­ple ques­tion, there is an unasked ques­tion: “To whom?”. Importers are being asked to declare the val­ue of their goods with­out being specif­i­cal­ly asked to declare to whom this val­ue applies. The real ques­tion that should be asked is “What is this val­ue of these goods to you?”

The real ques­tion that should be on the cus­toms dec­la­ra­tions forms is not “What is the val­ue of the goods?” but “What is the val­ue of the goods to you the importer?

Asked in this way, the val­ue is no longer the sales price to the cus­tomer, but the replace­ment cost of the prod­uct to the importer. To help importers with this ques­tion, we often ask them this same ques­tion a dif­fer­ent way, “If you were to lose these goods at the bor­der, how much insur­ance mon­ey would you require to cov­er your loss­es?” Asked this way, importers often look inward at exact­ly the ele­ments that make up the COGS price: BOM cost, labor rates and asso­ci­at­ed overhead.

So who is the importer of record for import

Here we come to the sec­ond impor­tant ele­ment of why we can use the COGS price at the time of import. If you are sell­ing your prod­ucts direct­ly to your cus­tomer on an EX WORKS basis, then your cus­tomer becomes the importer, and the ques­tion of “What is the val­ue of the goods to you?” is dif­fer­ent. In this case, the val­ue of the goods IS the sales price and not the COGS price.

By appoint­ing CAPLINQ as your fis­cal rep­re­sen­ta­tive, CAPLINQ acts on behalf of the for­eign sup­pli­er, which means that the for­eign sup­pli­er is the own­er of the goods and there­fore is also the importer of record. CAPLINQ sim­ply han­dles the trans­ac­tion as your fis­cal representative.

Multinationals have long known the secrets of customs valuations and COGS pricing

Fis­cal rep­re­sen­ta­tion and import­ing against the COGS price is well-known by multi­na­tion­als. For multi­na­tion­als that have sales offices in Ger­many, France, the Nether­lands or any oth­er EU coun­try, they are used to import­ing the goods using the COGS price and then sell­ing to their cus­tomers at a high­er sales price.

Imag­ine this sce­nario: A multi­na­tion­al has a wid­get that costs $10 to make in their fac­to­ry in Japan (or the Unit­ed States, Chi­na, Cana­da or any oth­er coun­try out­side the EU) and imports goods into the EU to sell to cus­tomers for $30. They have done this for many years and then decide to sell their Japan­ese fac­to­ry to a group of investors that do not have a sales office in the EU. Is it fair that the same wid­get, made in the same fac­to­ry com­ing to the EU all of a sud­den has duty imposed on it at $30 instead of $10? Of course it’s not, and it’s exact­ly the log­ic we use when dis­cussing with cus­toms offi­cers who agree with us entirely.

What risks are involved in importing goods at the COGS price?

None. For­eign sup­pli­ers are often wor­ried that import­ing goods at the COGS price car­ries a risk to it — but it is com­plete­ly unfound­ed. CAPLINQ has a fis­cal rep­re­sen­ta­tion license that allows us to import goods into the EU. Com­pa­nies that are grant­ed this license (includ­ing CAPLINQ) often have to go through a full finan­cial audit to be sure that the com­pa­ny is not invoiced in any ille­gal activ­i­ties includ­ing fraud or mon­ey laundering.

Fur­ther­more the tax author­i­ties, once they grant this license to fis­cal rep­re­sen­ta­tives, require them to make a sig­nif­i­cant deposit with the tax author­i­ties to ensure that if there are any sig­nif­i­cant con­cerns, that there are funds they can with­hold until the mat­ter is resolved. CAPLINQ of course has such a deposit with the tax authorities.

A simplified example to illustrate the CAPLINQ advantage

The fol­low­ing exam­ple illus­trates what CAPLIN­Q’s fis­cal rep­re­sen­ta­tion ser­vice can do for you and your EU customers.

Assume the fol­low­ing to be true:

• Prod­uct Descrip­tion: Epoxy Mold­ing Compound
• Prod­uct Tar­iff Code:: 3907.30.00.00
• Duty Rate: 6.5%
• COGS Price: $100
• Sales Price: $300

CAPLINQ can often make the goods avail­able to your cus­tomers in Europe for less than they pay in duty charges alone

Please vis­it www.caplinq.com to learn more how CAPLIN­Q’s fis­cal rep­re­sen­ta­tion ser­vice is used as part of our order ful­fill­ment ser­vices. You can also con­tact us to find out more about how to reduce your EU import duties by pay­ing duty on the pro­duc­tion val­ue (COGS) instead of the sales price.